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Submission by the Commissioner of Competition before the Canadian Radio-television and Telecommunications Commission—Broadcasting Notice of Consultation CRTC 2015-97—Call for comments on a Wholesale Code

May 4, 2015

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Introduction

The Competition Bureau (“Bureau”) is pleased to make this submission in response to the Canadian Radio‑television and Telecommunications Commission’s (“CRTC”) call for comments on a wholesale code to govern the commercial arrangements between broadcasting distribution undertakings (“BDU”), programming undertakings, and exempt digital media undertakings (“Wholesale Code”).

The Commissioner of Competition (“Commissioner”) supports the implementation of the Wholesale Code. The Commissioner is of the view that the framework set out in the Wholesale Code will ensure that BDUs are able to deliver increased consumer choice and flexibility in a “pick‑and‑pay” environment at reasonable prices, while sharing the risk of such a shift with programming undertakings.

Section 125 of the Competition Act grants the Commissioner the authority to, among other things, make representations to federal commissions in respect of competition. Pursuant to section 125 of the Competition Act, the Commissioner makes this submission.

This submission is focussed on the issue of penetration‑based rate cards (“PBRC”) identified in paragraph 25 of the Broadcasting Notice of Consultation CRTC 2015‑97 (“Notice of Consultation”).

The impact of PBRCs in the broadcasting market

PBRCs are wholesale price schedules that set out the wholesale rate paid by a BDU to a programming undertaking for a given level of subscriber penetration for a programming service.Footnote 1 PBRCs provide discounts to BDUs who achieve higher levels of subscriber penetration. As penetration levels decrease, however, the wholesale rate increases on a per‑subscriber basis. The discount for high or near 100% penetration can be quite steep. PBRCs are used by programming undertakings to provide revenue certainty. They are often designed to ensure that a programming service will earn a set level of revenue regardless of penetration.Footnote 2

In the face of steep PBRCs, BDUs may find it more profitable to bundle large numbers of programming services together, or to place more services in their basic offering. Packaging large numbers of programming services together increases penetration for all services in the bundle (some consumers buy the bundle for channel “A” others buy it for channel “B”, but both buy the entire bundle). Increased penetration reduces the wholesale cost for each service in the bundle subject to a PBRC.

If a BDU expects that the programming services that comprise the bundle would lose subscribers by unbundling, then the BDU will be reluctant to provide that option, as it may result in lower penetration rates and higher wholesale costs. The result is large “tiers” or “theme packs”, where consumers are often paying for services they may not want or may not value highly.

At the same time, PBRCs can be used to help drive the development of new programming services. New programming services often require significant capital upfront to launch (for content creation or acquisition, for example). The incentive for the BDUs to bundle (created by PBRCs) can provide necessary guaranteed financing to launch new, innovative programming services.

Nonetheless, the lack of choice and, implicitly, the large bundles and tiers created by BDUs reacting to PBRCs, are important drivers of what has led the CRTC to review how BDUs package and distribute programming services, as discussed in Broadcasting Regulatory Policy CRTC 2015‑96. These incentives to limit consumer choice are exacerbated by the presence of vertically‑integrated BDUs with broad ownership of so‑called “must have” programming services,Footnote 3 which will be discussed in more detail below.

Vertical integration and “must‑have” programming services

BDUs who offer increased consumer choice and flexibility risk lower penetration rates across services, resulting in higher wholesale costs. With higher wholesale costs, BDUs may find themselves pushing retail prices higher to remain profitable. The incentive, therefore, is to bundle programming services together to increase levels of penetration for all services in the bundle. Said differently, there is a disincentive to provide choice and flexibility. This disincentive is weaker for vertically‑integrated BDUs who can internalize the increased wholesale costs and drive penetration with lower prices.Footnote 4

Vertically‑integrated BDUs may have been incentivized to use PBRCs for two reasons. First, to ensure constant revenues and protect against the risk of subscriber losses. Second, to raise rivals’ costs and limit the incentive for rival BDUs to introduce choice and flexibility. The latter incentive is stronger for a vertically‑integrated BDU that operates so‑called “must‑have” programming services. In the context of increased choice and flexibility, BDUs facing PBRCs, especially with respect to “must‑have” programming services, may have the incentive to direct customers toward bundling or current “tiers” (and away from “pick‑and‑pay”) through retail pricing.

If vertically‑integrated BDUs are successful in raising rival BDUs’ costs, they will face less non‑price competition in retail markets, and this may limit their incentive to introduce choice and flexibility as well. If they choose to introduce choice and flexibility, they may be doing so in order to attract retail customers away from rival BDUs that are constrained from responding by the impact of PBRCs in a mandated “pick‑and‑pay” regime. Retail consumers do not get the full benefits of increased choice and flexibility in either of these possible outcomes.

To ensure that BDUs are able and incentivized to offer real choice and flexibility to consumers, and provide effective competition to vertically‑integrated BDUs on price and non‑price factors (such as what comprises their “small bundles” or if they offer a “pick your own bundle” option), PBRCs should be such that they do not create a choice and flexibility‑limiting incentive.

Factors that should be considered by the CRTC

In response to the question at paragraph 25 of the Notice of Consultation,Footnote 5 the Commissioner proposes that the CRTC take the following five factors into consideration in determining the reasonableness of a PBRC:

Whether the PBRC allows BDUs and programming undertakings to share the potential risks and costs associated with lower penetration levels of programming services in a world of increased choice and flexibility;

Whether the PBRC applies to an independent programming service or one operated by a vertically‑integrated BDU;

Whether a PBRC applied to a programming service operated by a vertically‑integrated BDU raises rival BDUs’ costs above those of the vertically‑integrated BDU;

Whether the PBRC applies to a programming service that is considered a “must‑have”; and

Whether the PBRC applies to a programming service that is newly licensed, and if so, the duration of that PBRC.

While the above is a non‑exhaustive list, where a consideration of these factors suggests that the PBRC likely induces a BDU to limit consumer choice and flexibility, the PBRC should be found to be unreasonable.

Conclusion

The Bureau is pleased to respond to the CRTC’s call for comments on this important subject. The Bureau supports the CRTC’s efforts to provide increased choice and flexibility to consumers. The Wholesale Code is an important document that will allow Canadians to enjoy the benefits of enhanced competition, innovation, and choice in the broadcasting sector.

For the purposes of this proceeding, the designated representative of the Commissioner is:

Footnotes

Footnote 1

For example, a very basic PBRC may have per‑subscriber wholesale prices of $1.00, $1.25, $1.50, $1.75, and $2.00 for 80% or higher, 60‑79%, 40‑59%, 20‑39%, and 0‑19% subscriber penetration, respectively.

A “must‑have” programming service refers to a service whose absence from a BDU’s lineup would cause sufficient subscriber losses to rivals such that all BDUs consider the service necessary to remain competitive. The most often cited examples are mainstream sports programming services that offer a wide variety of live sports.